(Answered) Question your firm is considering the purchase of a smaller

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Question: Your firm is considering the purchase of a smaller firm because it believes that it can manage the assets of that firm more efficiently. The smaller firm has free cash flow. Some researchers have argued that the existence of free cash flow can lead managers in a firm to make inappropriate acquisition decisions. To avoid these problems, these authors have argued that firms should increase their debt-to-equity ratio and "soak up" free cash flow through interest and principal payments. Is free cash flow a significant problem for many firms?

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